(5) LOANS AND ALLOWANCE FOR LOAN LOSSES

The following is a schedule of loans outstanding by category:

	December 31,
	2017					2016
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial and financial:
Commercial and industrial	$	995,207		21.08	%	$	828,260		18.82	%
Oil & gas production and equipment		95,574		2.02			84,228		1.91
Agriculture		141,249		2.99			144,751		3.29
State and political subdivisions:
Taxable		73,827		1.56			33,793		0.77
Tax-exempt		48,626		1.03			47,283		1.07
Real estate:
Construction		437,277		9.26			420,884		9.57
Farmland		195,162		4.13			197,872		4.50
One to four family residences		875,766		18.55			846,360		19.24
Multifamily residential properties		46,030		0.98			57,806		1.31
Commercial		1,487,927		31.51			1,426,643		32.42
Consumer		284,373		6.02			279,704		6.36
Other (not classified above)		40,977		0.87			32,648		0.74
Total loans	$	4,721,995		100.00	%	$	4,400,232		100.00	%

The Company’s loans are mostly to customers within Oklahoma and approximately 64% of the loans are secured by real estate. Credit risk on loans is managed through limits on amounts loaned to individual and related borrowers, underwriting standards and loan monitoring procedures. The amounts and types of collateral obtained, if any, to secure loans are based upon the Company’s underwriting standards and management’s credit evaluation. Collateral varies, but may include real estate, equipment, accounts receivable, inventory, livestock and securities. The Company’s interest in collateral is secured through filing mortgages and liens, and in some cases, by possession of the collateral.

The Company’s commercial and industrial loan category includes a small percentage of loans to companies that provide ancillary services to the oil and gas industry, such as transportation, preparation contractors and equipment manufacturers. The balance of these loans was approximately $81 million at December 31, 2017 and approximately $56 million at December 31, 2016.

There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company. As a lender, the Company faces the risk that a significant number of its borrowers will fail to pay their loans when due. If borrower defaults cause losses in excess of the Company’s allowance for loan losses, it could have an adverse effect on the Company’s business, profitability, and financial condition.

Loans secured by real estate, including farmland, multifamily, commercial, one-to-four family residential and construction and development loans, have been a large portion of the Company’s loan portfolio. The Company is subject to risk of future market fluctuations in property values relating to these loans. In addition, multi-family and commercial real estate (“CRE”) loans represent the majority of the Company’s real estate loans outstanding. A decline in tenant occupancy due to such factors or for other reasons could adversely impact the ability of the Company’s borrowers to repay their loans on a timely basis, which could have a negative impact on the Company’s financial condition and results of operation. The Company attempts to manage this risk through rigorous loan underwriting standards.

During the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage.

Nonperforming and Restructured Assets

The following is a summary of nonperforming and restructured assets:

	December 31,
	2017		2016
	(Dollars in thousands)
Past due 90 days or more and still accruing	$	2,893	$	1,962
Nonaccrual		31,943		31,798
Restructured		4,720		1,713
Total nonperforming and restructured loans		39,556		35,473
Other real estate owned and repossessed assets		4,424		3,866
Total nonperforming and restructured assets	$	43,980	$	39,339

Had nonaccrual loans performed in accordance with their original contractual terms, the Company would have recognized additional interest income of approximately $1.8 million in 2017, $2.0 million in 2016 and $2.0 million in 2015.

The Company charges interest on principal balances outstanding on restructured loans during deferral periods. The current and future financial effects of the recorded balance of loans considered to be restructured were not considered to be material.

Loans are segregated into classes based upon the nature of the collateral and the borrower. These classes are used to estimate the allowance for loan losses. The following table is a summary of amounts included in nonaccrual loans, segregated by class of loans. Residential real estate refers to one-to-four family real estate.

	December 31,
	2017		2016
	(Dollars in thousands)
Real estate:
Non-residential real estate owner occupied	$	1,108	$	713
Non-residential real estate other		9,809		5,688
Residential real estate permanent mortgage		781		1,116
Residential real estate all other		3,980		5,089
Commercial and financial:
Non-consumer non-real estate		7,785		4,464
Consumer non-real estate		250		265
Other loans		5,596		8,370
Acquired loans		2,634		6,093
Total	$	31,943	$	31,798

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following table presents an age analysis of past due loans, segregated by class of loans:

	Age Analysis of Past Due Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Greater		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 Days or More Past Due
	(Dollars in thousands)
As of December 31, 2017
Real estate:
Non-residential real estate owner occupied	$	998	$	68	$	977	$	2,043	$	639,575	$	641,618	$	84
Non-residential real estate other		2,905		271		2,112		5,288		1,121,303		1,126,591		432
Residential real estate permanent mortgage		2,211		403		977		3,591		326,743		330,334		584
Residential real estate all other		1,739		749		1,377		3,865		781,790		785,655		973
Commercial and financial:
Non-consumer non-real estate		2,210		706		1,785		4,701		1,279,704		1,284,405		403
Consumer non-real estate		2,085		670		293		3,048		285,872		288,920		194
Other loans		506		103		3,916		4,525		139,920		144,445		—
Acquired loans		753		192		713		1,658		118,369		120,027		223
Total	$	13,407	$	3,162	$	12,150	$	28,719	$	4,693,276	$	4,721,995	$	2,893
As of December 31, 2016
Real estate:
Non-residential real estate owner occupied	$	2,255	$	96	$	150	$	2,501	$	569,130	$	571,631	$	—
Non-residential real estate other		611		16		418		1,045		1,122,351		1,123,396		—
Residential real estate permanent mortgage		2,742		649		1,273		4,664		320,749		325,413		513
Residential real estate all other		2,559		531		1,416		4,506		743,723		748,229		369
Commercial and financial:
Non-consumer non-real estate		1,269		1,628		741		3,638		1,047,547		1,051,185		608
Consumer non-real estate		2,046		760		419		3,225		280,652		283,877		274
Other loans		5,345		958		7,775		14,078		127,404		141,482		45
Acquired loans		825		310		408		1,543		153,476		155,019		153
Total	$	17,652	$	4,948	$	12,600	$	35,200	$	4,365,032	$	4,400,232	$	1,962

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect the full amount of scheduled principal and interest payments in accordance with the original contractual terms of the loan agreement. If a loan is impaired, a specific valuation allowance may be allocated, if necessary, so that the loan is reported, net of allowance for loss, at the present value of future cash flows using the loan’s existing rate, or the fair value of collateral if repayment is expected solely from the collateral.

The following table presents impaired loans, segregated by class of loans. During the year ended December 31, 2017, $2.3 million of interest income was recognized on impaired loans subsequent to their classification as impaired. During previous periods no material amount of interest income was recognized on impaired loans subsequent to their classification as impaired.

	Impaired Loans
	Unpaid Principal Balance		Recorded Investment with Allowance		Related Allowance		Average Recorded Investment
	(Dollars in thousands)
As of December 31, 2017
Real estate:
Non-residential real estate owner occupied	$	2,011	$	1,945	$	141	$	1,858
Non-residential real estate other		10,323		10,240		496		3,975
Residential real estate permanent mortgage		1,745		1,542		146		1,440
Residential real estate all other		5,837		5,549		2,135		5,258
Commercial and financial:
Non-consumer non-real estate		18,101		11,158		2,412		11,131
Consumer non-real estate		545		514		127		541
Other loans		6,092		5,595		178		7,439
Acquired loans		4,737		3,145		12		3,539
Total	$	49,391	$	39,688	$	5,647	$	35,181

As of December 31, 2016
Real estate:
Non-residential real estate owner occupied	$	894	$	806	$	101	$	825
Non-residential real estate other		7,742		5,688		574		5,854
Residential real estate permanent mortgage		1,878		1,683		124		1,612
Residential real estate all other		5,871		5,614		1,538		5,445
Commercial and financial:
Non-consumer non-real estate		12,015		6,272		1,457		6,478
Consumer non-real estate		686		650		133		788
Other loans		9,799		8,415		1,870		8,062
Acquired loans		8,780		6,581		—		6,041
Total	$	47,665	$	35,709	$	5,797	$	35,105

Credit Risk Monitoring and Loan Grading

The Company considers various factors to monitor the credit risk in the loan portfolio including volume and severity of loan delinquencies, nonaccrual loans, internal grading of loans, historical loan loss experience and economic conditions.

An internal risk grading system is used to indicate the credit risk of loans. The loan grades used by the Company are for internal risk identification purposes and do not directly correlate to regulatory classification categories or any financial reporting definitions.

The general characteristics of the risk grades are as follows:

Grade 1 – Acceptable - Loans graded 1 represent reasonable and satisfactory credit risk which requires normal attention and supervision. Capacity to repay through primary and/or secondary sources is not questioned.

Grade 2 – Acceptable - Increased Attention - This category consists of loans that have credit characteristics deserving management’s close attention. These potential weaknesses could result in deterioration of the repayment prospects for the loan or the Bank’s credit position at some future date. Such credit characteristics include loans to highly leveraged borrowers in cyclical industries, adverse financial trends which could potentially weaken repayment capacity, loans that have fundamental structure deficiencies, loans lacking secondary sources of repayment where prudent, and loans with deficiencies in essential documentation, including financial information.

Grade 3 – Loans with Problem Potential - This category consists of performing loans which are considered to exhibit problem potential. Loans in this category would generally include, but not be limited to, borrowers with a weakened financial condition or poor performance history, past dues, loans restructured to reduce payments to an amount that is below market standards and/or loans with severe documentation problems. In general, these loans have no identifiable loss potential in the near future, however; the possibility of a loss developing is heightened.

Grade 4 - Problem Loans/Assets – Nonperforming - This category consists of nonperforming loans/assets which are considered to be problems. Nonperforming loans are described as being 90 days and over past due and still accruing, and loans that are nonaccrual. The government guaranteed portion of Small Business Administration (“SBA”) loans is excluded.

Grade 5 - Loss Potential - This category consists of loans/assets which are considered to possess loss potential. While the loss may not occur in the current year, management expects that loans/assets in this category will ultimately result in a loss, unless substantial improvement occurs.

Grade 6 - Charge Off - This category consists of loans that are considered uncollectible and other assets with little or no value.

The following table presents internal loan grading by class of loans:

	Internal Loan Grading
	Grade
		1		2		3		4		5	Total
	(Dollars in thousands)
As of December 31, 2017
Real estate:
Non-residential real estate owner occupied	$	520,641	$	105,696	$	13,852	$	1,429	$	—	$	641,618
Non-residential real estate other		931,295		178,282		14,290		2,724		—		1,126,591
Residential real estate permanent mortgage		289,200		33,033		6,352		1,749		—		330,334
Residential real estate all other		621,401		149,201		9,418		5,635		—		785,655
Commercial and financial:
Non-consumer non-real estate		1,018,172		234,884		24,322		6,997		30		1,284,405
Consumer non-real estate		268,826		17,499		2,038		557		—		288,920
Other loans		136,617		5,668		1,203		957		—		144,445
Acquired loans		65,685		34,418		17,113		2,811		—		120,027
Total	$	3,851,837	$	758,681	$	88,588	$	22,859	$	30	$	4,721,995

As of December 31, 2016
Real estate:
Non-residential real estate owner occupied	$	464,504	$	89,978	$	16,220	$	929	$	—	$	571,631
Non-residential real estate other		933,743		169,561		14,404		5,688		—		1,123,396
Residential real estate permanent mortgage		284,893		32,889		5,987		1,644		—		325,413
Residential real estate all other		614,338		119,018		9,382		5,491		—		748,229
Commercial and financial:
Non-consumer non-real estate		856,318		170,865		19,101		4,901		—		1,051,185
Consumer non-real estate		263,442		17,154		2,640		641		—		283,877
Other loans		132,254		5,376		1,514		2,338		—		141,482
Acquired loans		92,946		42,668		12,888		6,517		—		155,019
Total	$	3,642,438	$	647,509	$	82,136	$	28,149	$	—	$	4,400,232

Allowance for Loan Losses Methodology

The allowance for loan losses (“ALL”) is determined by a calculation based on segmenting the loans into the following categories: (1) adversely graded loans [Grades 3, 4 and 5] that have a specific reserve allocation; (2) loans without a specific reserve segmented by loans secured by real estate other than one-to-four family residential property, loans secured by one-to-four family residential property, commercial, industrial and agricultural loans not secured by real estate, consumer purpose loans not secured by real estate, and loans over 60 days past due that are not otherwise Grade 3, 4, or 5; (3) Grade 2 loans; (4) Grade 1 loans and (5) loans held for sale which are excluded.

The ALL is calculated as the sum of the following: (1) the total dollar amount of specific reserve allocations; (2) the dollar amount derived by multiplying each segment of adversely graded loans without a specific reserve allocation times its respective reserve factor; (3) the dollar amount derived by multiplying Grade 2 loans and Grade 1 loans (less certain exclusions) times the respective reserve factor; and (4) other adjustments as deemed appropriate and documented by the Senior Loan Committee or Board of Directors.

The amount of the ALL is an estimate based upon factors which are subject to rapid change due to changing economic conditions and the economic prospects of borrowers. It is reasonably possible that a material change could occur in the estimated ALL in the near term.

The following table details activity in the ALL by class of loans for the period presented. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	ALL
	Balance at beginning of period		Charge- offs			Recoveries		Net charge-offs			Provisions charged to operations			Balance at end of period
	(Dollars in thousands)
As of December 31, 2017
Real estate:
Non-residential real estate owner occupied	$	5,602	$	(74	)	$	6	$	(68	)	$	661		$	6,195
Non-residential real estate other		10,793		(47	)		16		(31	)		(243	)		10,519
Residential real estate permanent mortgage		3,129		(373	)		25		(348	)		445			3,226
Residential real estate all other		8,622		(330	)		66		(264	)		1,314			9,672
Commercial and financial:
Non-consumer non-real estate		12,421		(1,344	)		1,033		(311	)		3,224			15,334
Consumer non-real estate		2,804		(913	)		180		(733	)		722			2,793
Other loans		4,045		(3,727	)		23		(3,704	)		2,140			2,481
Acquired loans		1,277		(157	)		77		(80	)		249			1,446
Total	$	48,693	$	(6,965	)	$	1,426	$	(5,539	)	$	8,512		$	51,666
As of December 31, 2016
Real estate:
Non-residential real estate owner occupied	$	4,661	$	(11	)	$	3	$	(8	)	$	949		$	5,602
Non-residential real estate other		9,921		(9	)		6		(3	)		875			10,793
Residential real estate permanent mortgage		3,148		(208	)		55		(153	)		134			3,129
Residential real estate all other		6,725		(181	)		21		(160	)		2,057			8,622
Commercial and financial:
Non-consumer non-real estate		11,754		(2,921	)		122		(2,799	)		3,466			12,421
Consumer non-real estate		2,642		(1,088	)		159		(929	)		1,091			2,804
Other loans		2,648		(388	)		17		(371	)		1,768			4,045
Acquired loans		167		(101	)		32		(69	)		1,179			1,277
Total	$	41,666	$	(4,907	)	$	415	$	(4,492	)	$	11,519		$	48,693

The following table details the amount of ALL by class of loans for the period presented, on the basis of the impairment methodology used by the Company.

	ALL
	December 31, 2017				December 31, 2016
	Individually evaluated for impairment		Collectively evaluated for impairment		Individually evaluated for impairment		Collectively evaluated for impairment
	(Dollars in thousands)
Real estate:
Non-residential real estate owner occupied	$	656	$	5,539	$	716	$	4,886
Non-residential real estate other		751		9,768		1,119		9,674
Residential real estate permanent mortgage		483		2,743		422		2,707
Residential real estate all other		2,761		6,911		2,160		6,462
Commercial and financial:
Non-consumer non-real estate		4,651		10,683		3,317		9,104
Consumer non-real estate		429		2,364		478		2,326
Other loans		133		2,348		1,812		2,233
Acquired loans		12		1,434		495		782
Total	$	9,876	$	41,790	$	10,519	$	38,174

The following table details the loans outstanding by class of loans for the period presented, on the basis of the impairment methodology used by the Company.

	Loans
	December 31, 2017						December 31, 2016
	Individually evaluated for impairment		Collectively evaluated for impairment		Loans acquired with deteriorated credit quality		Individually evaluated for impairment		Collectively evaluated for impairment		Loans acquired with deteriorated credit quality
	(Dollars in thousands)
Real estate:
Non-residential real estate owner occupied	$	15,281	$	626,337	$	—	$	17,149	$	554,482	$	—
Non-residential real estate other		17,013		1,109,578		—		20,092		1,103,304		—
Residential real estate permanent mortgage		8,100		322,234		—		7,631		317,782		—
Residential real estate all other		15,052		770,603		—		14,873		733,356		—
Commercial and financial:
Non-consumer non-real estate		31,349		1,253,056		—		24,002		1,027,183		—
Consumer non-real estate		2,600		286,320		—		3,203		280,674		—
Other loans		764		143,681		—		2,254		139,228		—
Acquired loans		14,464		100,106		5,457		13,459		135,616		5,944
Total	$	104,623	$	4,611,915	$	5,457	$	102,663	$	4,291,625	$	5,944

Transfers from Loans

Transfers from loans to other real estate owned and repossessed assets are non-cash transactions, and are not included in the statements of cash flow.

Transfers from loans to other real estate owned and repossessed assets during the periods presented are summarized as follows:

	Year ended December 31,
	2017		2016		2015
	(Dollars in thousands)
Other real estate owned	$	2,889	$	2,553	$	2,139
Repossessed assets		1,242		1,402		1,098
Total	$	4,131	$	3,955	$	3,237

Related Party Loans

The Company has made loans in the ordinary course of business to the executive officers and directors of the Company and to certain affiliates of these executive officers and directors. Management believes that all such loans were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons and do not represent more than a normal risk of collectability or present other unfavorable features. A summary of these loans is as follows:

Year Ended December 31,	Balance Beginning of the Period		Additions		Collections/ Terminations			Balance End of the Period
	(Dollars in thousands)
2017	$	27,486	$	7,350	$	(10,835	)	$	24,001
2016		37,577		16,133		(26,224	)		27,486
2015		25,019		22,330		(9,772	)		37,577